The Real Heroes of the 1998 Budget Surplus: Clinton and His Economy

When Bill Clinton took office in January 1993, the federal budget deficit was projected to be $310 billion that year, or about 5 percent of GDP. The Congressional Budget Office was also projecting that five years later, in 1998, the federal budget would still be in the red to the tune of $357 billion, or 4.5 percent of GDP. At the time, the CBO called the deficit outlook, “grim.”

Five years later, the United States enjoyed its first federal budget surplus in nearly 30 years—an incredible turnaround given the bleak projections at the beginning of the Clinton administration. Who, or what, was responsible for the more than $360 billion fiscal improvement? Was it President Clinton who deserves the credit as is widely believed? Or is it, as recently claimed by then-Speaker of the House Newt Gingrich, he, who by shutting down the government in 1995, eventually forced the budget into the black?

There are, indeed, two main heroes in the story of the remarkable budget surplus of 1998, but neither of them are Newt Gingrich or his Republican Congress. It turns out that their contribution to deficit reduction did more harm than good. No, the true heroes of deficit reduction were, first, President Clinton, whose 1993 budget—passed without a single Republican vote—raised taxes on the wealthy and dramatically altered the nation’s fiscal path, and second, a steadily improving economy. Those two factors, and particularly the interaction between them, account for virtually the entire fiscal improvement. Contrary to the Gingrich assertion, legislation passed by the Republican-led Congress of 1995 through 1997 combined to actually worsen the fiscal situation—albeit slightly.

In order to assign credit (or blame) for shifts in the country’s fiscal fortunes from 1993 to 1998, we scoured Congressional Budget Office reports from that period. Usually, over the course of a single year, the CBO releases three projections of the federal budget, each revised from the previous release to account for changes in legislation, economic conditions, and technical assumptions, and describe each change in some detail. We can see clearly what actually defeated the deficit by compiling and studying the changing CBO estimates of the 1998 budget.

Take President Clinton’s 1993 budget bill—officially known as the Omnibus Budget Reconciliation Act of 1993. OBRA, which mainly raised taxes on wealthy people but also raised the gas tax, extended limits on discretionary spending and cut back on some mandatory spending, was signed into law on August 10, 1993. Just five months prior, the Congressional Budget Office projected a 1998 deficit of $360 billion. One month after the bill passed, the CBO’s new estimate of the 1988 deficit was down to $200 billion. The CBO explained the dramatic improvement this way: “For the first time in two and one-half years, the deficit projections have taken a decided turn for the better… The reconciliation act deserves most of the credit for the improvement over the long run.” Indeed, of the $160 billion improvement from March to September of that year, CBO directly credited OBRA with $143 billion. In fact, OBRA turns out to have been the single largest contributor to the 1998 surplus.

After OBRA, the second largest contributor to fiscal improvement over the period was the rapidly strengthening economy. As the economy improved, the government began to take in more revenue than expected, since taxpayers were making more money, and had to spend somewhat less than expected, as poverty declined and the demand for social services declined with it. Over the course of the five-year period, CBO assigned a total of $102 billion in fiscal improvement directly to the effects of this kind of broad economic growth. There is also another substantial block of fiscal improvement—about $66 billion worth—that CBO classifies as “technical changes” but that are probably best categorized as economic. This $66 billion was the result of revenue collections that exceeded the level that CBO was expecting even with higher economic growth. In part, this occurred because the economic data on which CBO relied was lagging behind the actual boom.

But there is another reason why the economic boom produced even more revenue than expected, and again, it had absolutely nothing to do with Newt Gingrich. I’ll let the CBO report from September 1997 explain: “Over the past four years, growth in revenues has consistently outpaced that of gross domestic product (GDP) by 2 to 3 percentage points. Several factors have contributed to that outcome. The tax increases enacted in the Omnibus Budget Reconciliation Act of 1993 were the main causes in 1994 and 1995. Also, the personal and corporate income tax bases grew faster than GDP over the period, especially in 1996 and 1997. Higher income taxpayers experienced above-average income growth, which boosted revenues because their income is taxed at higher marginal rates.”

In other words, the rapid growth in personal and corporate income, especially among those at the top of the income ladder, interacted with the higher tax rates that Clinton and the Democratic Congress enacted in 1993. The result was even more revenue flowing into the treasury than just the economic factors or the new tax system alone would have predicted.

All together, OBRA plus direct economic factors, plus even higher than expected revenues from their interaction combined to produce a $311 billion fiscal improvement. That $311 billion wiped away more than 85 percent of the deficit. No help from Newt Gingrich required.

The remaining $50 billion or so of deficit reduction came mainly from lower than anticipated health care spending, lower than anticipated debt service payments, and other technical adjustments.

Notice that legislation crafted by the GOP-led Congress had no net impact whatsoever on the 1998 balanced budget. But that isn’t quite fair. There were several bills passed by Gingrich’s Congress that did impact the budget projections for 1998. It’s just that—and pay attention to this next part— their combined effect was to increase the deficit that year. Congress passed and Clinton signed a bill to reform the welfare system in late 1996. That fall, Congress also passed a few other policy changes that had fiscal impacts. All together, these changes spurred CBO to lower its 1998 deficit projection by about $14 billion. The following year Congress passed the so-called “Balanced Budget Act of 1997,” which is the very bill to which Newt Gingrich points when he tries to claim credit for 1998’s surplus. But the facts get in the way of Gingrich’s nice story.

The Balanced Budget Act of 1997 actually increased the deficit for 1998. Indeed the CBO reported that the passage of that bill resulted in a $21 billion deficit increase, which more than offsets any fiscal improvement stemming from the previous year’s legislation. The combined legislative changes passed during the first three years of Speaker Gingrich’s tenure added $5 billion the deficit in 1998.

It is easy to see how tempting it must be, given our current budget troubles and how we got here, for conservatives such as Newt Gingrich to try and take credit for the last time we turned our fiscal future around. But simply put, Gingrich and his Republican Congress had nothing at all to do with balancing the budget in 1998. In fact, the net effect of their efforts was to make the fiscal situation slightly worse. The real reason the budget went from a projected $360 billion deficit to a small surplus was higher tax rates passed by a Democratic Congress, and a booming economy presided over by President Bill Clinton.

Michael Linden is the Associate Director for Tax and Budget Policy at American Progress.